Stagflation shadow looms over the US stock market

Wall Street strategists have issued warnings, believing that the U.S. economy is sliding into stagflation, with the impact of tariff policies beginning to show, potentially limiting the Federal Reserve's ability to significantly cut interest rates.

On August 7, it was reported that Wall Street analysts indicated that data shows a period of persistent inflation and weak economic growth is approaching; however, investors have largely ignored these warning signs so far: the S&P 500 has set multiple historical highs this year, and the U.S. Treasury index is expected to record its best performance since 2020.

Currently, traders believe inflation is under control, betting that the Federal Reserve will cut interest rates twice this year, with the first cut possibly implemented as early as next month. Last Friday's U.S. labor market data showed that hiring activity has cooled in recent months, further fueling these bets.

However, strategists warn that the "reciprocal tariffs" that took effect on Thursday could disrupt market expectations, as higher prices will be passed on to consumers and businesses, potentially driving up price levels.

Multiple Investment Banks Issue Stagflation Warnings

Torsten Slok, Chief Economist at Apollo Management, wrote in a recent report:

"The market clearly expects rate cuts, but the upside risk of inflation is significant. The bottom line is that the stagflation theme in the market is intensifying."

Slok's comments echo similar views from strategists at institutions such as BNY Mellon, Bank of America, TD Securities, and Brown Brothers.

Geoffrey Yu, a macro strategist at BNY Mellon, wrote:

"The evolving tariff landscape will prove to be stagflationary, both lowering growth and pushing up inflation. This is precisely what seems to be happening now."

Analysts at Bank of America Global Research wrote in an earlier report this week: "Inflation remains stuck above target. We believe it is stagflation, not recession." The institution maintains its expectation that the Federal Reserve will not cut rates this year.

As previously reported, the U.S. June CPI rose 2.7% year-on-year, the highest record since February, slightly exceeding expectations of 2.6%. The latest inflation data will be released next Tuesday (August 12), with economists expecting the annual rate to rise to 2.8%.

Although Neel Kashkari, President of the Minneapolis Federal Reserve, stated on Wednesday that "the economy is slowing, and it may become appropriate to start adjusting the federal funds rate in the short term," he also acknowledged that tariffs remain a major variable. He stated:

"The impact of tariffs on the U.S. economy will affect policy and could even change expectations for two rate cuts this year. If inflation really rises due to tariffs, we may even raise rates again; tariffs are so unknown right now."

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